Economic Views

The case for small caps in a world of deflation and disruption

The recent under performance of a number of small cap markets has prompted suggestions that the traditional arguments in their favor no longer hold. We disagree. As we enter a period of unprecedented disruption and deflationary growth, we argue that small caps can bring a number of unique characteristics to a wider portfolio.


Over the last 30 years, the case for investing in small caps has been debated extensively. The long-term statistics certainly suggest that smaller companies do indeed outperform larger ones. There is less agreement on the reasons. The explanations range from the contention that small caps offer a risk premium in return for lower liquidity, that limited research means any new information has a bigger impact on the shares, and/or that small companies in aggregate tend to grow faster than larger ones. Whatever the case, even though US small caps have underperformed large by over 10% in the last two years, their outperformance over a longer period is dramatic. So what of the future?

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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.